My wife and I rented a community garden plot at Duke Farms this year. This was something new for me. I am a garening novice. The Community Garden is strictly organic – so we needed to learn to deal with beetles, caterpillars, and blight without the aid of modern chemistry. In some cases we were successful, in other cases, not so much. But we learned a lot, I totally enjoy my new hobby, and I am already drawing up plans in my head for next year’s garden.
I had an excellent crop of tomatoes – my kids would groan when I’d come in the door with another bag full of fresh red fruit. Likewise, we enjoyed fresh lettuce, kale, peppers, green beans, and sugar snap peas through much of the summer. But all was not perfection. Our cucumber and squash plants were devastated by insects, and our sweet corn (while not a complete loss) produced a disappointing yield thanks to (I think) inadequate soil nutrition and some very hungry earworms.
On the whole, I have to say my garden was a success. But what if I had decided earlier in the year to plant only cukes and squash? In this case, I would not be so happy with my garden performance. In fact, my garden would have been a total loss. Between bugs and weather, it was just not a good year for those veggies.
Creating a successful investment portfolio is much the same way. Investors who commit too much of their portfolio to a single type of investment (i.e. stocks, or gold) will experience poor performance whenever that single asset class has a bad year. Just as weather conditions in a given year may favor one crop over another, different economic conditions in one year may favor stocks, in another year bonds, or maybe gold or real estate. And just as we simply do not know at the beginning of the year what weather conditions will impact our garden, we can’t really know in advance what economic or market conditions will impact our investment portfolio.
As I plan next year’s garden, I wonder if I should bother with squash and cucumbers at all, since they were such a failure this year? Well, using investment logic, yes I should! It is very possible that conditions next year will be more favorable to cukes and squash, and not so much to this year’s successful tomatoes and green beans. If I only grow what worked this year, and conditions next year are very different, I may be disappointed. Likewise, an investor with a diversified portfolio will frequently have one investment which is not performing as well as the others. Does that mean that you should give up on that investment? Well, it depends. If the investment simply faced poor “weather” conditions (such as stocks doing poorly in recession), you may do well to hang on. Conditions next year may be very different, and last year’s cucumber may be next year’s tomato.
We have noticed in our financial planning practice that many investors in recent years have been spooked by the market, and are afraid to invest at all. And I will admit, there is a lot of uncertainty out there. But here too, there is something to learn from my gardening effort. Before we rented out plot, other gardeners told us how difficult the gardening was the previous year. Too much rain, insect infestations, we didn’t hear much to be excited about. But we went ahead and planted anyway. Why plant even with so much uncertainty? Well, to have any chance of success, I needed to put seeds in the ground. If I didn’t, I had a 100% probability of spending more for my veggies in the supermarket. Likewise, money needs to be invested productively if you want to have any chance at all of keeping up with or outpacing inflation. In today's age of ultra low interest rates, not investing means a nearly 100% chance that the purchasing power of your nest egg will decline.
Knowing what the ideal mix of investments might be for your own portfolio can get a bit tricky. If you don’t have the knowledge base or confidence to invest on your own, you can find a Certified Financial Planner™ to help at www.letsmakeaplan.org.
Investing always involves risk, including risk of loss of principle. Diversification may reduce risk of loss, but does not eliminate risk. Investors should consult with their investment advisor before acting on any recommendations in this article.